I love my work. Best of all is when a situation that’s potentially confusing in “real life” gets boiled down into a single elegant journal entry in QuickBooks.
Say you’re working with a very small organization (our favorite kind!) with only two employees. One of these employees has asked for a $1000 advance on their payroll. The advance was approved by the board, and the employee is going to pay it back with deductions of $50 in subsequent paychecks. But nobody involved knows exactly what to do.
First, it’s best to create some kind of memo laying out the advance and its repayment terms, to be signed by the employee and their supervisor (here, probably the board chair). Next, call your payroll processor. Ask them to generate a paycheck for the employee for the gross amount, no payroll taxes withdrawn. Otherwise, the employee will be taxed twice on this thousand dollars—once when they receive the advance, and once again as they pay it back in increments of fifty dollars (each of which is deducted from the net paycheck after taxes).
Now, how do you book the advance? It would be incorrect to show it as a normal salary expense, because it represents an advance on salary that hasn’t yet been earned. It’s moving forward in time, so to speak, so it is more correctly shown as a balance-sheet transaction, along the same lines as a prepaid expense. Record it with a journal entry debiting (increasing) an Advance Payroll asset account and crediting (decreasing) your cash. If it’s part of a larger payroll, you can quite tidily tuck this into your usual payroll entry by adjusting the credit to cash—your processor’s report will give the correct amount—and adding in the Advance Payroll debit.
In the world of cooperative/radical/generally crunchy bookkeeping, you may find yourself wondering how to post a transaction that involves barter. Because until the revolution comes we still need GAAP.
Say for instance that Topher is dog-walking for web designer Merrie while Merrie designs Topher’s website. They agree that Topher will barter for the web design. Merrie invoices Topher for design services amounting to $200. In the meantime, Topher has provided $200 worth of dog walks, for which he invoices Merrie. You are Merrie’s bookkeeper. The name of the dog is not pertinent, but is Peppermint.
- Create an asset account called Bank Clearing. If possible, set this up as a “cash” or bank account in the general ledger.
- Post Merrie’s invoice to Topher. Two hundred dollars is thus recorded in revenue.
- Post Topher’s bill to Merrie. You have thus recorded a $200 expense.
- Pay Topher’s bill, using Bank Clearing instead of the usual cash account. This clears the liability from Accounts Payable and creates a negative ($200) in Bank Clearing.
- Receive a payment against Merrie’s invoice, again using Bank Clearing instead of cash. This clears the receivable and zeroes out Bank Clearing.
The fun of this comes when you are bartering your own bookkeeping services and therefore have to run through all of the above steps twice—once in your client’s books and once, in the other direction, in your own.
This is a little scary, but the government has rolled out a new I-9 form. The I-9 is a form you need to sign a new employee up for payroll. Or, to quote Citizenship and Immigration Services, “Form I-9 is used for verifying the identity and employment authorization of individuals hired for employment in the United States. All U.S. employers must ensure proper completion of Form I-9 for each individual they hire for employment in the United States. This includes citizens and noncitizens.”
Okay, so it’s only scary if you have a default paranoid style like mine. Which, to be fair, is not a bad style for a bookkeeper.
CKB works with some very small nonprofits. Very small as in there is one employee and Cathy. Even if—perhaps especially if—your org is super-wee, you need to have as many internal controls in place as possible to keep things from going haywire. An internal control is a process for handling money that helps protect your organization from fraud, theft, abuse, and other bad things. Blue Avocado, an excellent site for nonprofits that’s included on our Links page, offers the following thoughts on how teeny-tiny organizations can maintain basic internal controls:
- Set the control environment (make sure people know there are policies that must be followed).
- Define clearly who is responsible for what.
- Physical controls (lock it up).
- Always have two people count cash.
- Reconcile your bank statements!
Read a detailed explanation of each point, plus additional notes on payroll and checks, from Carl Ho at Blue Avocado.
UPDATE: The American Institute of CPAs has a good and related take: “4 Critical Reasons Startups and Smaller Organizations Need Internal Control.”
Worrying about 1099s already? If, like Cathy Keeps Books, you subscribe (or have been subscribed to) various accounting-related e-mails, you may have seen something like this:
This one came from Paychex. Previously, the forms were always due to recipients (your contractors) at the end of January—but the government reporting copy, the 1096, was due at the end of February, or in March if you e-filed it. Starting with tax year 2016 (that is, with the forms you file at the start of 2017), that government deadline will also be the end of January, for both paper and e-filing. By the way, the same applies to W-2s and their associated W-3.
I’ve never understood why there was a month allowed between recipient and IRS filing. For a bookkeeper, the biggest risk is screwing up on recipient forms; you can always amend your 1096, but if you get a contractor’s payment wrong on her 1099, she’ll be pissed. So this deadline change is no big deal to me.
UPDATE: The implementation of this rule has been delayed indefinitely.
If you use ADP’s payroll service, you’ve been getting a lot of updates about upcoming changes to overtime rules. Now they’re here! These rules are good news for workers, in my opinion. Briefly, where an employee previously needed to make only $455 per week to qualify for exempt status (a worker is “exempt” when they are on salary, e.g. not eligible for overtime; there are several other criteria involved as well), they now need to make $913 a week. If you are paying your exempt employees less than $913 a week, you need to check yourself! Raise their salaries or reclassify them as non-exempt. The argument that this change will have a negative impact on small businesses and/or nonprofits holds no water with Cathy Keeps Books. You knew you were on a progressive site when you got here.
Read more about the new rules here.
Edit: Additional links have come my way from CNN and the Department of Labor itself. And here’s the DOL’s detailed guidance for nonprofits.
I worked at a client where they photocopied their cash. If a customer paid for something in cash, or if staff came back from an event where cash was collected, they fanned those bills out on the copier glass and took a picture of them as backup documentation for the deposit. I’m not recommending this method, which doesn’t make much sense because cash is fungible (those nineteen dollars could be anyone’s nineteen dollars, so you’re not really creating reliable documentation), but it actually came in handy from time to time when I was sorting through a pile of deposits and got confused.
Instead of photocopying them, I record cash deposits with an Excel spreadsheet that totals up bills and coins by denomination. This may not be any more reliable as backup, but at least it’s tidy, and you can note on the spreadsheet when and where the cash was collected. And it saves you having to arrange a bunch of twenty-dollar bills on a copier and possibly lose one of them in that little space between the hinge of the lid and the wall. You can download my template to the right.
Our previous blog entry covered freelancer tax tips, specifically the shitload of taxes you will owe in your journey as a freelancer. As we mentioned, the IRS requires that self-employed individuals pay quarterly estimated taxes to make up for the quarterly payments that are not being made by an employer. It can be very painful to discover that you have underpaid your estimated taxes, which is why we’re writing this post in the first person plural, because this definitely didn’t happen to us.
Remember that your estimated taxes cover not just your self-employment tax (i.e., twice the usual amount of FICA), but your income tax as well, and any other taxes on income that is not subject to withholding. In Cathy Keeps Books’s experience, there are two ways to figure estimated taxes. You can project your tax for the year, most likely by basing it on last year’s, and divide that into quarters. Or you can do a quarter-by-quarter calculation and remit a percentage of each quarter’s income to the feds. For instance, you already know you’ll be paying 15.3% of your income in self-employment tax (6.2% to Social Security plus 1.45% to Medicare, doubled). Add to that your best estimate of your income tax rate. If you think you’re going to be taxed at 20%, you’ll want to remit 15.3% + 20% = 35.3% of what you made in the quarter.
Once again, Cathy Keeps Books is just a regular person and this is not professional tax advice. But take it from us and estimate higher, not lower, to avoid a storm of emotion on April 14.
Kids, this comes from the New York Times so is presumably pretty legit. In “Tax Tips for Those Who Make Money in the Gig Economy,” from the March 4 Sunday Business section, Tara Siegel Bernard lays it out: self-employment taxes, expenses and deductions, estimated tax payments, health insurance. A great starting point for new freelancers.
From Cathy Keeps Books’s point of view, the most important thing to know about self-employment is you’re going to pay a lot of taxes. Or, at any rate, more than you’ll want to believe when you’re just starting out. You know how when you’re working for the man, a chunk of your paycheck is taken out for taxes? That deduction probably includes:
- FICA (Federal Insurance Contributions Act). This comprises Social Security, at 6.2% of your wages, and Medicare, at 1.45%.
- Your federal income tax.
- Your state income tax.
Meanwhile, your employer pays their share of FICA, which is usually equal to yours (barring tax-relief legislation for workers, or what not). When you’re working for yourself, what happens to that chunk of your paycheck? Well, you don’t get a paycheck, so no chunk gets taken out. That means you have to pay your own FICA, federal and state income tax out of whatever you’ve earned. Moreover, you have to pay employer’s FICA, too, because you’re your own employer. And in a special twist, because you’re not contributing taxes every time you get a check, you have to pay estimated taxes on a quarterly basis.
In short, freelancing is totally awesome, but do your tax research before you start out and avoid getting into trouble later.
Boston’s Bay State Banner, a venerable Black newspaper, has recently introduced the slick Boston Biz magazine. The March 2016 issue included an article called “Manage Your Money” by Martin Desmarais. It listed the following apps:
- Expensify: “streamlines the process of tracking and organizing employee expenses.”
- Indinero: “a platform that takes care of all accounting, payroll and tax needs” for small businesses.
- Wave: “a popular accounting, payroll and invoicing app with services that cover all of a small business’s finance needs.”
- FreshBooks: “allows small businesses to create online invoices, capture expenses, record times on a job and track cash flow and expenses.”
- Zoho Books: “the platform and its mobile app version cover all aspects of a business, from sales and marketing to email collaboration and even hiring.”
As a bookkeeper, I think granularly and in technical details, and I think about GAAP. Therefore, I am not crazy about working on these platforms. I had a bad experience with Wave which did not allow me to reconcile bank accounts the way I wanted to and in general proved to be the wrong path for me and my client. These new finance apps were not created for bookkeepers. If you want me to keep your books, I will encourage you to create a QuickBooks Online account and add me as an “accountant.” If you really want me to work in one of the above apps I will try, but I probably won’t be happy.